Liar, Liar: Texas Supreme Court Rejects Fraud As Basis For Ignoring Dealer Agreements

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Foley & Lardner LLPOne of the most important tools manufacturers and franchisors have available to manage their networks are the agreements they sign with their channel partners. Significant time and effort go into those contracts, ensuring that the business relationships they govern work smoothly, and generate predictable outcomes. Recognizing the importance of these agreements, dealers or franchisees with a dispute will often plead fraud and ask courts to set agreements aside in place of more favorable terms.

The Texas Supreme Court recently dealt a serious blow to this sort of game-playing. In Mercedes-Benz, LLC USA v. Carduco, Inc., the Court held that, under Texas law, a dealer may not justifiably rely on the supplier’s alleged misrepresentations when the agreement at issue expressly contradicts the offending statements. 583 S.W.3d 553 (Tex. 2019).

Plaintiff Carduco bought the assets of a Mercedes-Benz dealership in the South Texas town of Harlingen. Id. at 555-56. Carduco alleged that it only did so because Mercedes-Benz made oral representations that Carduco could relocate its dealership to another town in South Texas called McAllen and be the area's exclusive dealer of Mercedes-Benz vehicles. Id. Carduco claimed that it repeatedly expressed its desire to re-locate to McAllen, and Mercedes-Benz representatives even scouted possible new locations with Carduco. Id. At around the same time, Mercedes-Benz was allegedly negotiating with another dealer about a dealership in McAllen without disclosing such talks with Carduco. Id.

Carduco purchased the assets of the Harlingen dealership and signed a new dealer agreement with Mercedes-Benz. Id. at 556. However, the dealer agreement expressly contradicted the alleged representations made to Carduco: It limited Carduco's right to operate to the dealership in Harlingen, Texas, and did not grant Carduco exclusive rights to sell Mercedes-Benz vehicles in the area. Id. Mercedes-Benz then announced it was granting to a different dealer the McAllen location and denied Carduco's formal request to relocate there. Id. Carduco filed suit claiming fraudulent inducement of the dealer agreement. Id. The jury awarded Carduco $15.3 million in actual damages and $115 million in punitive damages. Id. The Corpus Christi–Edinburg Court of Appeals upheld the judgment but reduced the punitive damages award to $600,000. Id. Both parties appealed to the Texas Supreme Court. Id. at 556-57.

A prerequisite of fraud is proof of justifiable reliance. Carduco argued that Mercedes-Benz fraudulently induced Carduco to enter into the franchise agreement, based on representations that Carduco could relocate to McAllen as the exclusive dealership in the region, and that the franchisor had no plans to put another dealer in the McAllen area. Id. at 557. Mercedes-Benz argued that the alleged misrepresentations were irrelevant. Id. The clear language of the dealer agreement precluded reasonable reliance on pre-contractual representations because the express terms conflicted with them. Id.

The Court held that the "fundamental problem with Carduco's case" was that "Carduco should have insisted on [exclusivity] terms in the parties' contract rather than agreeing in writing to the opposite."  Id. at 561.  The Court held that an agreement’s directly contradictory terms and the plaintiff’s sophistication precluded justifiable reliance. Id. at 559 (citing Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648 (Tex. 2018)). The Court concluded that Carduco's reliance was unjustified as a matter of law.

The Court also rejected Carduco's argument that Mercedes-Benz had a duty to disclose because its representative made partial disclosures that triggered a duty to say more. Id. at 561-62. The Court cited the general rule that a failure to disclose is not fraud unless there is a duty to disclose. Id. at 562. No duty of disclosure arises without a confidential or fiduciary relationship. Id. at 563. The Court also reiterated that the relationship between a franchisor and prospective franchisees is not a special or fiduciary relationship. Id.

The Supreme Court’s decision strengthens the hand of manufacturers and franchisors who rightly expect to rely on the terms of their dealer and franchise agreements when a dispute arises.  Although legally binding only on Texas courts, the Texas Supreme Court’s reasoning may help persuade other courts around the country to hold parties to their contractual promises.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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